Offshore accounts: the next target

U.S. authorities are expanding their investigation of hidden overseas assets far beyond Switzerland. The latest focus: the Cayman Islands.

Undercover agents from the Internal Revenue Service conducted a yearlong probe that led to the arrests in Miami last month of three financial advisers based in the Caribbean territory.

This past week, an official at the Justice Department said the sting should serve as a warning about offshore accounts.

“The Cayman case illustrates that we have ways of getting information that people don’t know about,” Assistant Attorney General Kathryn Keneally of the department’s Tax Division said at a news conference in New York. “The days of waiting for a warning sign, such as a letter from a bank, are over.”

Keneally said that the government receives account information from many sources, including whistleblowers hoping for monetary rewards. She declined to comment on whether U.S. officials have the names of Americans who hold accounts in the Caymans or elsewhere in the Caribbean as a result of this probe.

Taxpayers are ineligible to participate in the IRS’s limited-amnesty program for undeclared offshore accounts if U.S. authorities already have their names. The program imposes steep penalties but offers protection against criminal prosecution.

Experts believe U.S. authorities do have names of account holders in the Caymans.

“Announcements by the government about this case suggest it already has customer lists, although officials can’t confirm it,” says Bryan Skarlatos, a lawyer at Kostelanetz & Fink in New York, which has handled more than a thousand confessions by U.S. taxpayers with offshore accounts.

In 2009, after authorities obtained information about the identities of clients of Swiss banks, they began a sweeping crackdown on hidden overseas assets. The effort has led to the indictment of more than 100 taxpayers and advisers. More than 43,000 taxpayers have entered limited-amnesty programs.

Swiss banking giant UBS CH:UBSN -1.40%   agreed to pay $780 million in 2009 to settle charges it helped Americans shield assets. Other U.S. enforcement efforts have involved accounts elsewhere in the Caribbean, Israel, India and Liechtenstein. But the recent arrests marked the first prominent case centered in the Caymans.

According to an indictment unsealed last month, Joshua VanDyk, Eric St-Cyr and Patrick Poulin were arrested in Miami on March 12 and charged with money laundering and conspiracy to launder money on behalf of U.S. clients.

The indictment said that St-Cyr was the founder of an unidentified Cayman-based investment firm with many U.S. clients that VanDyk worked for, while Poulin was a lawyer at a firm in the Turks and Caicos Islands with many U.S. clients.

(St-Cyr has been an unpaid contributor to MarketWatch’s Trading Deck section, which features market commentary and analysis from industry professionals who aren’t staff members. MarketWatch, like The Wall Street Journal, is a unit of Dow Jones. St-Cyr’s most recent contribution was in May 2013, and MarketWatch said it won’t be publishing any further pieces from him, pending the outcome of the case.)

St-Cyr and Poulin are Canadians, while VanDyk is a U.S. citizen, according to the indictment. Jeffrey Neiman, a lawyer for St-Cyr, and Andrew Levi, a lawyer for VanDyk, had no comment on behalf of their clients. Jayne Weintraub, Poulin’s attorney, says “he is a lawyer with a reputable law firm and is presumed innocent.”

In March of last year, the indictment says, three undercover IRS agents met with St-Cyr and VanDyk in Miami. One of the agents represented himself as a U.S. citizen who wanted to launder $2 million.

To show how the scheme worked, Poulin, VanDyk and St-Cyr arranged several transfers of $200,000, the indictment alleges.

In December, the funds were wired from a Virginia account to an account at Poulin’s law firm in the Turks and Caicos, according to the indictment. The $200,000 was then moved to an account in the Cayman Islands, and most of it was returned to the U.S. in February.

Poulin allegedly told the IRS agents that most of his clients were Canadian or American. The entire $2 million was intended to be concealed, in part by using a foundation named Zero Exposure in the Turks and Caicos.

St-Cyr and VanDyk allegedly said that they charged clients more to launder criminal proceeds than to assist in tax evasion, according to the indictment. They also said a foundation was preferred for laundering criminal proceeds, while a trust was sufficient to conceal tax evasion.

William Sharp, a lawyer based in Tampa, Fla., and Zurich with extensive experience handling offshore-account disclosures, says he believes U.S. officials may have information about the advisers’ clients or others.

“It’s impossible to know with certainty, but they may have already indicted names on the defendants’ customer list,” he says.

Credit: Market Watch